Banking Structure in India: Types of Banks

What is Banking Structure?

Banks have played a critical role in the economic development of some developed countries such as Japan and Germany and most of the emerging economies including India. Banks today are important not just from the point of view of economic growth, but also financial stability. In emerging economies, banks are special for three important reasons.

First, they take a leading role in developing other financial intermediaries and markets. Second, due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs.

Finally, in emerging markets such as India, banks cater to the needs of a vast number of savers from the household sector, who prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks. Forms of banking have changed over the years and evolved with the needs of the economy.

The transformation of the banking system has been brought about by deregulation, technological innovation and globalization. While banks have been expanding into areas that were traditionally out of bounds for them, non-bank intermediaries have begun to perform many of the functions of banks.

Banks thus compete not only among themselves, but also with nonbank financial intermediaries, and over the years, this competition has only grown in intensity. Globally, this has forced the banks to introduce innovative products, seek newer sources of income and diversify into non-traditional activities.

Banking Structure in India

These are some main points of banking structure in India:

  1. Banking Regulator
  2. Scheduled Banks in India
  3. Public Sector Banks
  4. Regional Rural Banks
  5. Private Sector Banks
  6. Foreign Banks
  7. Co-operative Banks

Banking Regulator

The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.

Scheduled Banks in India

Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions’ assets.

SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country.

Public Sector Banks

Public sector banks are those in which the majority stake is held by the Government of India (GoI). Public sector banks together make up the largest category in the Indian banking system. There are currently 27 public sector banks in India.

They include the SBI and its 6 associate banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd. Public sector banks have taken the lead role in branch expansion, particularly in rural areas.

Public sector banks account for the bulk of the branches in India. In the rural areas, the presence of the public sector banks is overwhelming; in 2009, 96 percent of the rural bank branches belonged to the public sector. The private sector banks and foreign banks have a limited presence in the rural areas.

Regional Rural Banks

Regional Rural Banks (RRBs) were established during 1976-1987 with a view to developing the rural economy. Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring public sector commercial bank.

RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the government has introduced a number of measures to improve the viability and profitability of RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a State.

This process of consolidation has resulted in a steep decline in the total number of RRBsto 86 as of March 31, 2009, as compared to 196 at the end of March 2005.

Private Sector Banks

In this type of bank, the majority of share capital is held by private individuals and corporates. Not all private sector banks were nationalized in 1969, and 1980. The private banks which were not nationalized are collectively known as the old private sector banks and include banks such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc.

Entry of private sector banks was however prohibited during the post-nationalisation period. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBIpermitted the private sector to enter into the banking system.

This resulted in the creation of a new set of private sector banks, which are collectively known as the new private sector banks. As of end-March, 2009 there were 7 new private sector banks and 15 old private sector banks operating in India.

Foreign Banks

Foreign banks have their registered and head offices in a foreign country but operate their branches in India. The RBI permits these banks to operate either through branches; or through wholly-owned subsidiaries.

The primary activity of most foreign banks in India has been in the corporate segment. However, some of the larger foreign banks have also made consumer financing a significant part of their portfolios. These banks offer products such as automobile finance, home loans, credit cards, household consumer finance etc.

Foreign banks in India are required to adhere to all banking regulations, including priority-sector lending norms as applicable to domestic banks. In addition to the entry of the new private banks in the mid-90s, the increased presence of foreign banks in India has also contributed to boosting competition in the banking sector.

Co-operative Banks

Co-operative banks cater to the financing needs of agriculture, retail trade, small industry and self-employed businessman in urban, semi-urban and rural areas of India. A distinctive feature of the cooperative credit structure in India is its heterogeneity.

The structure differs across urban and rural areas, across states and loan maturities. Urban areas are served by urban cooperative banks (UCBs), whose operations are either limited to one state or stretch across states.

The rural cooperative banks comprise State cooperative banks, district central cooperative banks, SCARDBs and PCARDBs. The cooperative banking sector is the oldest segment of the Indian banking system.

The network of UCBs in India consisted of 1721 banks as of end-March 2009, while the number of rural co-operative banks was 1119 as of end-March 2008.10 Owing to their widespread geographical penetration, cooperative banks have the potential to become an important instrument for large-scale financial inclusion, provided they are financially strengthened.

The RBI and the National Agriculture and Rural Development Bank (NABARD) have taken a number of measures in recent years to improve the financial soundness of cooperative banks.

Types of Banks in India

There are various types of Banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc.

On the basis of functions, the banking institutions in India may be divided into the following types:

  1. Central Bank
  2. Commercial Banks
  3. Development Banks
  4. Cooperative Banks
  5. Specialised Banks

Central Bank

A Bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Government’s banker; maintain deposit accounts of all other banks and advances money to other banks, when needed.

The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the banker’s bank. The Reserve Bank of India is the central bank of our country. The Central Bank maintains records of Government revenue and expenditure under various heads.

It also advises the Government on monetary and credit policies and decides on the interest rates for Bank deposits and Bank loans. In addition, foreign exchange rates are also determined by the Central Bank.

Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other Bank other than the Central Bank can issue currency.

Commercial Banks

Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loans to business enterprises. Nowadays some of the commercial Banks are also providing housing loans on a long-term basis to individuals.

Types of Commercial Banks

These are the three types of commercial banks lets discuss them:

  1. Public Sector Banks
  2. Private Sectors Banks
  3. Foreign Banks
Public Sector Banks

These are banks where the majority stake is held by the Government of India or the Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Baroda, Punjab National Bank, Canara Bank, Bank of India and Oriental Bank of Commerce, etc.

Private Sectors Banks

In the case of private sector banks majority of the share capital of the Bank is held by private individuals. These Banks are registered as companies with limited liability. For example The Jammu and Kashmir Bank Ltd., ICICI Bank Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, ING Vysya Bank, etc.

Foreign Banks

These Banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Development Banks

Business often requires medium and long-term capital for the purchase of machinery and equipment, for using the latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks.

They also undertake other development measures like Public Sector Banks comprising 19 nationalized banks and State Bank of India and its 7 associate Banks subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public.

Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

Cooperative Banks

A cooperative bank is a financial entity that belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often formed by persons belonging to the same local or professional community or sharing a common interest.

Co-operative banks generally provide a wide range of banking and financial services to their members. People who come together to jointly serve their common interests often form a cooperative society under the Co-operative Societies Act. When a cooperative society engages itself in the banking business it is called a Co-operative Bank.

Society has to obtain a license from the Reserve Bank of India before starting a banking business. Any co-operative bank as a society has to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, society must follow the guidelines issued by the Reserve Bank of India.

Types of Cooperative Banks

There are three types of cooperative banks operating in our country. They are primary credit societies, central cooperative banks and state cooperative banks. These banks are organized at three levels, village or town level, district level and state level:

  1. Primary Credit Societies
  2. Central Cooperative Banks
  3. State Cooperative Banks
Primary Credit Societies

These are formed at the village or town level with the borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent fraud.

Central Cooperative Banks

These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state cooperative banks.

State Cooperative Banks

These are the apex (highest level) cooperative banks in all the states of the country. They mobilise funds and help in its proper channelization among various sectors. The money reaches the individual borrowers from the state cooperative banks through the central cooperative banks and the primary credit societies.

Specialised Banks

There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialised banks. Let us know about them.

  1. Export Import Bank of India (EXIM Bank)
  2. Small Industries Development Bank of India (SIDBI)
  3. National Bank for Agricultural and Rural Development (NABARD)

Export Import Bank of India (EXIM Bank)

If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you with the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.

Small Industries Development Bank of India (SIDBI)

If you want to establish a small-scale business unit or industry, a loan on easy terms can be available through SIDBI. It also finances the modernisation of small-scale industrial units, the use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries.

National Bank for Agricultural and Rural Development (NABARD)

It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks.

It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.

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